ECB to Ensure Yields Remain in Step With Economy, Lane Tells FT

The European Central Bank won’t allow interest rates to rise too soon while the economy still grapples with the coronavirus pandemic, according to its chief economist.

“Our objective is basically to make sure the yield curves, which play an important role in determining overall financing conditions, do not move ahead of the economy,” Philip Lane said in an interview with the Financial Times.

“It is really a shift in monetary policy away from focusing on just the short-term rate by looking at all financing conditions,” because long-dated yields are key too.

Policy makers decided last week to “significantly” increase the pace of buying in coming months amid concerns that higher yields will pull the rug out from under the euro-area economic recovery.

Yields for government debt in major economies are rising on hopes for the U.S. economic rebound and reviving consumer price growth. Still, the euro area trails the U.S. in its vaccine campaign and economic recovery.

The ECB has pledged to keep borrowing costs low for the duration of the pandemic.

“Over time the relation between the appropriate level of yields and inflation will move,” Lane said.

Lane echoed comments from other members of the ECB’s Governing Council, saying there’s still room to cut interest rates below the current level of -0.5%.

He also shied away from a numerical target for yields, “because we are not in such a knife-edge situation that it makes sense to keep the 10-year yield at a permanently fixed value.”

The institution is currently evaluating its inflation objective as part of a strategy review. Lane said there’s a “very strong logic” to letting inflation run moderately above target for a while after a period of missing it.

“There is a very strong analytical case for flexible average inflation targeting, but there are other options that may also be successful in anchoring inflation expectations,” he said.

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